Real reasons for Kwacha depreciation and rising inflation

The Zambian Kwacha breached the psychological mark of K6.00 (K6, 000 un-rebased) The major cause of the challenge the Kwacha has been facing is lack of confidence in the economy by the actors in the economy mainly the investors.

When PF came into power they grabbed Zamtel, have been threatening to grab ZANACO, grab this company and that company. As a result most of the investors are sitting on the fence due to the unstable economic conditions and policies, coupled with inconsistency statements and incoherent actions.

When PF came into power Bank of Zambia had 5.9 months of imports in gross net reserves down to 3.1 months as 25th February 2014. This amount could be lower given the intervention BoZ made in the first week of March 2014. The portfolio investment in the commercial banks was US$350.0 million and this is below US$10.0 million in all the commercial banks. Just before elections Standard Chartered Bank was about to syndicate a loan of US150.0 million locally that was used for the formula 1 roads. Since the beginning of the year BoZ has been trying to buy US$30.0 million for a loan due to China Import and Export Bank but to no avail.

Secondly when they introduced SI 55 those who remember the Permanent Secretary at Finance a Nkulukusa had a bitter exchange with Miles Sampa that the measure was not good for the economy. What happened they bull dozed their way. This measure is affecting the operations of most of the operators in the economy. Among those affected are the mines who use leased equipment those contractors. These contractors were facing challenges in remitting their obligations due to the lessors. Consequently most of this equipment has been taken back. And you get surprised when the copper production for 2013 is lower than for 2011 and 2012. It is simple when the quantity of copper exported is lower the earnings are lower. It is no wonder what the mines paid in 2013 was lower than what they paid in 2009.

So the Kwacha is continuously depreciating because demand is higher than supply. Don’t be cheated that a depreciating Kwacha is good for the Zambian economy. How can that be good in country that literally imports over 95 percent of its products for manufacturing industry and even consumables. For example, 35 percent comes from South Africa and 60 percent from China and the rest of the world.

In terms of our exports, over 80 percent of our exports is copper and in raw material form, except for labour and electricity are imported.

Even worse, Zambia’s standing with multi-national lending institutions is not good, especially after the economic prospects were downgraded by financial and economic rating agencies.

As a result, the country can no longer qualify to borrow money from credible institutions and developed economies because we are a high-risk country that cannot be trusted.

This situation was worsened by the failure to account for the US$700 million Eurobond that we borrowed last year out of excitement. Currently, we have almost nothing to point at as to what that money was used for, with some of it still marooned in banks losing value but interest rates is accumulating.

Do you wonder why up to now, the Zambian government has not been able to organize another bond facility despite indicating they were going to do so in this year’s budget?

Furthermore, Zambia’s financing and economic programme from the IMF and World Bank has so far not been approved for almost one year.

IMF and World Bank officials were in Zambia last year in October during which Finance Minister Alexander Chikwanda and his officials presented the programme, but it was rejected owing to the huge budget deficit.

Up to now, the economic programme has not been approved until Zambia gives practical and tangible steps on how the huge financing deficit will be managed.

And if the IMF and World Bank cannot approve the economic programme, it is difficult to get favourable loans because they are the ones that recommend to other lending institutions.

As a result, of the failure by the IMF to approve Zambia’s economic programme Chikwanda cannot borrow from credible international institutions other than Chinese Banks.

Hence, he went to parliament to seek approval and raised the borrowing for domestic threshold. But by Chikwanda now resorting to internal borrowing as a government, this has negative economic consequences because the private sector will be denied of the much needed money for borrowing for capital projects.

Further, it has the dangers of increasing the domestic interest rates for domestic borrowing because government has also become a major player in the internal borrowing.

In simple terms if you imported a Toyota corolla with crystal lights the month President Banda left the landed cost in Lusaka after paying for everything its landed cost was US$5,838 or K28,000 and the same car today in Japan still costs US$5,838 or K35,142 an increase of 25 percent or K7,142. Next time someone tells you that the depreciation of the Kwacha against the dollar is good ask them that whether paying K7, 142 more for a car is good for their pockets.

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